Doctors' insurance unit may be altered

The Illinois State Medical Society is mulling a restructuring of its malpractice insurance affiliate in hopes of fueling expansion into other states.

The Illinois State Medical Inter-Insurance Exchange may convert to a mutual or stock insurance company, both of which would allow the company to raise capital, executives confirmed Tuesday. The board may discuss the conversion as early as next week's meeting, and a change could occur this year.

A conversion of the Chicago-based exchange, known as ISMIE, comes at time of unprecedented consolidation of malpractice insurance companies as they try to spread their risk. ISMIE is the 10th-largest provider of malpractice insurance in the nation, with nearly 10,000 policyholders and more than $160 million in revenues from premiums.

ISMIE's growth prospects also could have ramifications for the doctor group's political action committee--one of the biggest spenders on statewide elections. High-ranking executives at ISMIE also serve as lobbyists for the medical society.

"This is more of an issue of having a structure set up so you are able to move quickly and be a viable business entity in the 21st Century," said Saul Morse, vice president and general counsel for both the medical group and the exchange. "It is possible something could happen this year, but it is not definite."

Currently, ISMIE is structured as a reciprocal company, which operates similar to a mutual company in that policyholders have an ownership stake. But ISMIE executives say that structure is outdated and doesn't allow for the company to access capital. ISMIE is licensed only in Illinois and is at a competitive disadvantage to companies that have the ability to sell in multiple states, executives said.

Doctors' malpractice insurance premiums are rising nearly 15 percent, on average, this year, but malpractice insurers say they need the ability to leverage the cost of policies across larger numbers of doctors to control costs and grow.

At the high end, some companies are raising rates 50 percent or more, said Carol Brierly Golin, editor of the Chicago-based Medical Liability Monitor, which follows the physician malpractice insurance business.

For now, ISMIE executives say the exchange is financially stable and could remain a reciprocal company.

Last fall, the group shelved plans to convert to stock ownership when public markets soured, but they haven't ruled out such an offering. "In any of these options, it would remain owned by the policyholders," Morse said.

When ISMIE filed documents with the Securities and Exchange Commission last year about its plan for a stock conversion, it offered a rare glimpse into the financial structure of an organization whose executives are known for their clout in Springfield.

Al Lerner, who is chief executive of both ISMIE and the medical society, drew a salary, bonus and other compensation of more than $1.2 million from the malpractice insurance company in 1998, according to the SEC filing. Meanwhile, the documents say Donald Udstuen, ISMIE's chief operating officer, made $385,000 from the insurer, and Jeffrey Holden, chief administrative officer, made $264,000. All three draw separate compensation from the medical society as well.

The medical society said the three executives would not comment.

Under the leadership of Lerner, Udstuen and Holden, ISMIE gave at least $187,000 in three payments to the medical society's political action committee from December 1999 to July of 2000, state records show.

ISMIE defended the contributions to the medical society's PAC. The insurance company and the medical society share similar political concerns for "physicians and their patients," Morse said. "It should be no surprise that the exchange is supportive of the public policy initiatives of the medical society."